Criticisms of Positive Accounting Theory and its Implications

Accounting theory
questions

Contents
Question 1: What are some of the criticisms of PAT? Do you agree with them? Why or why not?
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Question 2........................................................................................................................................7
REFERENCES..............................................................................................................................10

Question 1: What are some of the criticisms of PAT? Do you agree with them?
Why or why not?
Positive accounting theory is regarded as a sound economic principle. Positive
accounting theory makes no recommendations for accounting practise and says little about
whether a company's accounting strategy is good or poor. In their empirical studies, researchers
do not take into account the relationships between company managers and accountants. Positive
accounting theory hypotheses and the findings of several audits are focused on the accounting
policies of major politically sensitive companies (Schroeder, Clark and Cathey, 2019). PAT is
almost inaccurate because it does not have any prescription; rather, it describes and forecasts
what will occur, which is the aim of positive accounting theory, and this is inadequate. It isn't
value-free because it just describes and forecasts what people might do, ignoring what they
might do entirely. It is assumed that any manager's (agent) and owner's (principal) decisions are
motivated solely by self-interest, with the primary objective of increasing their own wealth
without regard for any negative consequences. In the selection of research topics and the design
of research studies, it is difficult to avoid value judgments.
Accounting bonuses are sometimes used to compensate managers. The aim of this
incentive package is to keep the organization's managers aligned with the owners' interests. From
the standpoint of productivity, the establishment of a management incentive scheme makes
sense. The management incentive package assumes that managers will choose an accounting
method that will maximise their earnings, resulting in a bonus increase.
Early analysis based on the assumption that the share price represents accounting
information is based on stock market efficiency expectations and believes that capital market
participants can ‘undo' the impact of various accounting methods. It also assumes that there will
be no transaction costs. Accept these conclusions, and since the choice of accounting methods
has no influence on the business and has little effect on the tax situation, managers should be
unconcerned about the choice of accounting methods. Managers, on the other hand, do not seem
to be indifferent, according to the proof. The evolution of agency theory demonstrates that agents
do not inherently work in the organization's best interests, but rather with their own, and work as
a result of organisational decision-making. The individual in control, on the other hand, may